III. The Bitter Harvest of Neo-classical Economics

Neo-classical Economics has dominated thinking and policy now for half a
century or so. The results are better than those achieved in Eastern
Europe, but NCEists cannot take credit for our market economy, much as
they boast of it. The North Atlantic nations had a well-oiled market
economy functioning long before NCE drove out classical and Progressive
economics. What can NCEists claim as their heritage, their contribution
to our well-being? "What have they done for us lately?"

They have achieved power, and implemented much of their program. They
have dismantled most of the reforms of the Progressive Era, and
discredited their rationale. They have successfully stifled the movement
to convert the general property tax into a pure land tax. Going further,
they have shifted taxes off all property, especially land, and onto
payrolls and retail sales, beyond Ely's dreams. They have achieved
"uniformity" in income taxation, and more, given preferential treatment
to land income and unearned increments. They have substantially
deregulated utility and railway rates, and seen that regulatory
commissions are drawn from the monopolies being regulated. They have
privatized, or are privatizing, much of the public domain (including
fisheries, the radio spectrum, water, and the right to clean air)
without compensation to the public. They have done away with obsolete
urban mass transit by substituting average-cost pricing for the old
Georgist-Hotelling marginal-cost pricing supplemented by taxes on land
value. They have turned the banks loose to lend on speculative land
values, and bailed them out when they failed.

They have nullified the Progressive Era electoral reforms by pouring
money into politics and "deep lobbying," including higher education, to
achieve Abram Hewitt's goal and "make men who are equal in liberty
content with inequality in property." In the name of "freedom to choose"
they have subsidized land speculators by extending public services in
every direction at the expense of median taxpayers on small lots. They
have starved pre-collegiate education that serves everyone, and
subsidized graduate education that serves the few. They have poured ever
more of our tax money into prisons, to uphold respect for law and order.
Clark and Pareto and Seligman and Fetter and Johnson and Ely, surveying
the scene from their heavenly thrones, must glow with pride. Let us,
however, look at this Utopia they have created for us.

A. Worsening condition of labour

1. The share of labour in national income has been falling; the share of
property has been rising. (If we include imputed income, unrealized
capital gains, interest on the national debt, and pensions, the share
goes higher.) In spite of this rise, the rate of saving and capital
formation is falling. A rising share of property income is going to
aliens.

2. Real wage rates have fallen in the U.S.A. since about 1975, for given
kinds of work. At the same time, American youth is turned into worse and
worse kinds of jobs. Real wages of men with a high school education fell
21%, 1973-91. Those with less than a high school education fell 26%.
Wages of young urban black workers fell 50% (sic!) (Business Week, 29
June 92, p.91). This has forced women into the labour market. The
proportion of women working, or seeking jobs, rose from 38% to 58%.
According to David Ellwood, Harvard Professor of Public Policy, this,
rather than the welfare system, is what accounts for the rise of single
parenting. Women have less incentive to marry, and stay married. Rising
welfare may have had some impact from 1960-70. Since 1975, however, real
benefits have fallen.

3. Unemployment has risen to chronically high levels. NCEists shrug it
off by defining it away. The "natural" or "normal" rate of unemployment
keeps rising: 2%, 3%, 6%, 11%, ... there is no natural cap, apparently,
on what NCEists will call natural so long as they are in power. Rising
employment, once an occasion to celebrate, has become bad news: NCEists
automatically tighten money to choke it off. Joblessness is just a
personal taste in the NCE cant: "To explain why people allocate time to
... unemployment, we need to know why they prefer it to all other
activities" (Lucas). Others say the unemployed are just engaged in the
vital economic function of "job search."

4. Homelessness has risen to new heights, in spite of decades of
subsidies to home-building, favorable tax treatment of owner-occupied
residences, and an excessive diversion of national capital into
residences. The problem, apparently, is "not production, but
distribution," to resurrect an old phrase long discarded by Paretian
NCEists. The 1990 Census shows that 10% of all dwelling units in the
U.S.A. stand empty at any given time - many of these are the second
homes of the more affluent. In California, affluent Newport Beach has
the highest fraction of its units vacant. As to the homeless, in the NCE
world some people just have a "taste" for sleeping over heating grates,
under freeways, in cardboard boxes, and in doorways. In the NCE paradigm
they are engaged in the vital economic function of "home search," a
search they conduct every evening. They are guided in this by "rational
expectations." Either that or they are "mentally disturbed":
irrationality puts one beneath and outside the NCE system.

5. Hunger is still with us. "Second Harvest," a nationwide network of
food banks, reports that children account for half of all people needing
help from food pantries or soup kitchens, and 73% of households it
serves have incomes under $10,000. As Congress debated terminating The
Emergency Food Assistance Program (TEFAP), they got the following advice
from Robert Rector of The Heritage Foundation:

"It's not surprising that 10% of the American public is lining up to get
free meals. But it doesn't mean they're malnourished. The more welfare
assistance you give to people, the more dependence you have" (Dixon, 1994).

It is not reported that he or his Foundation have agitated to lower payroll
taxes, which fine people for working, or retail sales taxes, which fine
people for supporting their families. Most NCEists support such fines,
then join Rector in "blaming the victim."

6. Beggary, once rare, is everywhere, here in the midst of great wealth
and capital and new technology and universal education, all the NCE
panaceas which are supposed to make jobs. You might call it, "Progress
and Poverty," a phrase worth jotting down.

The current NCE answer to these problems is to downsize labour forces
in major industries to make them "leaner and meaner." "Efficiency" and
"productivity" have become identified with layoffs. In some unknown
future this is supposed to create new jobs by making us more
"competitive."

B. Worsening returns to capital

In spite of worsening returns to labour, we also have a worsening
condition of capital.

1. The returns on savings are at historically low levels, especially
after taxes.

2. The domestic saving rate is low. This implies a high consumption
rate, which Keynes et al said would help us, but it doesn't seem to be
working that way - a matter on which neo-Keynesians are silent.

3. Foreign savings rates in Japan and Europe, which bailed us out in the
1980s, seem to be drying up, too, following the collapse of Japan's
"bubble economy," and the onset of recession in Europe.

4. American capital is increasingly decayed and obsolete, as old capital
is replaced too slowly. We have lost much of our steel and auto
industries. Many of our power plants and oil refineries are ancient,
with grandfather rights to continue polluting the only air our people
can breathe. Much of our public capital is too old, its replacement made
highly expensive by the low density per mile of line. New York City,
which in 1902 was able to build and operate a subway charging 5 cents to
ride anywhere, now cannot even maintain and operate what it already has,
even while charging fares so high they can hardly be collected.

5. Our financial system is a shambles, surviving only by virtue of
loading hundreds of billions of dollars of bad debts onto the taxpayers.

C. The concentration of wealth and income is high and rising

A higher share of the national income is going to property. As a
simple test of this, the labour-price of land has risen sharply, for
residential or business use. The writer has calculated that the
labour-price of an American farm, for example, has risen from 6 years'
industrial wages to 17 years, 1954-87 (Gaffney, 1992a). (In terms of
farm wage rates, the labour-price is a good deal higher in both years.)

As to urban residences, The California Association of Realtors publishes
a regular "Affordability Index." It shows the fraction of households
that could afford to buy the median price house. They assume 20% down,
and 30% of income used on monthly payments, with a 30-year mortgage. In
November, 1990, the index said that only 32% of households could afford
to buy a house at the U.S. median price of $130,000. (That means a debt
of 104,000, paymemt of about $11,000/yr., indicating income of about
$37,000.)

A Report by Ernst and Young, and the National Real Estate Index, relates
the cost of buying a standard house to take-home pay. It varies from
lows of 18% in Omaha and Kansas City to highs of 50% in San Francisco
and 49% in Honolulu.

During the 1980s the merger movement reached new heights. It has long
since been shown that mergers lead to lower output, more downtime, fewer
jobs, and alienation between employer and community (Udell). It is
obvious to all that "investment" in mergers and acquisitions creates no
new wealth nor capital nor jobs.

The number of American farms has fallen from 6 million to 1 million, 1920-90
while the population rose. In 1900 there was one farm per 11 Americans; in
1987 only one per 133.At the same time, the Gini Coefficient (a measure of
concentration) among the farms that remain has risen from .57 in 1910 to
.76 in 1987 (Gaffney, 1992a). It is possible to adjust the Gini
Concentration Coefficient for the loss of farms, by adding the lost 5
million farms to the data universe as farms with zero acres. Doing so,
the 1987 Ratio is .92 instead of .76 (Gaffney, 1992a).

Income has grown more concentrated, too, but its Gini Ratio is much
lower than that for property ownership of any kind. Likewise, its
increase is less. That is because so much of income, at least as defined
and measured by NCE statisticians, consists of the gross cash flow from
labour.

The modern enclosure movement of common property resources proceeds
apace. The ocean fisheries, until recently open to all, are being
privatized through licensure. While this may be necessary to avoid
overuse, it is not necessary to give the newly minted licenses away, as
is being done. Former fishermen have become instant millionaires, living
in idleness and luxury by renting their licenses to working fishermen,
suddenly creating a class structure where before there was equal
opportunity. Air polluters, instead of being fined or charged pro rata
their effluents, are being given "Offset rights" to sell. The radio
spectrum has been and is being given away in valuable chunks. Having
once made J. Werner Kluge of Virginia into America's second richest
person, the FCC has now given the McCaw company so much of this public
domain that it recently sold out to AT&T for $12.5 billions. 40-year
contracts to receive irrigation water from Federal projects are
currently being converted into perpetual ownerships that the original
contractors may sell to the highest bidder. These "innocent" purchasers
are to receive not just the water, but a right to demand that the
taxpayers subsidize their water service (storage, conveyance, quality
protection, etc.) forever. The national parks are being turned over to
private concessionaires, some of them politically selected, who charge
what the traffic will bear while paying no more than token rents to the
public that owns the parks. Offshore oil and gas are being auctioned off
to private lessees under a system that the major oil firms seem to
control and manipulate to their major advantage. The Forest Service is
spending $10 on roading for every $1 in forest revenues, in some
marginal areas. All these giveaways, the kinds of things the
Progressives stopped, are back in full fashion to the loud cheering of
the "new resource economists," steeped in NCE and Ayn Rand.

D. Social problems we thought were cured are returning to haunt us.

Americans have experienced a sharp loss of community. There is little
place for the sense of public service, or honor or patriotism or duty or
loyalty or devotion or dedication or responsibility in NCE: it is
cynical of such values. The family is an anachronism, a communistic
unit. Private individuals, motivated by individual self-interest, make
the system work. Public servants are assumed to be moved by the same
self-seeking. Those who think otherwise are fools or hypocrites.

That philosophy has a self-fulfilling quality. It is a short step from
that to their viewing themselves as chumps and suckers if they act for
the public weal. "Heroic," in NCE lingo, is a term of reproach;
"bribery" is rational. Selling out one's country for cash is not
inherently bad, in NCE thinking, it is expected. Accordingly, we now
have retired Congressmen lobbying for foreign powers, without remorse or
rebuke. We even have unretired Congressmen representing foreign powers -
does not NCE teach that individuals should serve those who pay them? We
have national treasures sold to aliens, we have defense secrets sold to
foreign spies, all justified by going for the top dollar. After all, the
marginal productivity of the stealth bomber might be higher to the Iraqi
Air Force than to ours.

"Greed is good," as Gordon Gecko put it, is the central NCE creed. Ayn
Rand and Harry Browne are the new Messiahs. Church is still tolerable,
but only if it narrows its focus to individual salvation: social
concerns (like those of Moses and Jesus) are out. Almost anything public
or common is suspect: public schools, public health, public transit,
public parks and beaches, public monitoring of weights and measures,
public inspection of foods and drugs, common rights of citizenship,
public safety, public restrooms, public care of the feeble-minded,
common waters, common lands, common carriers, public utilities, public
broadcasting, public courtesy, social behavioral controls, public
financing of political campaigns, the public good ... . Only the public
roads are acceptable, because they may be used and dominated by private
vehicles. The individual driver, windows closed except to toss out
trash, doors locked, air-conditioner running, muffler cut, catalytic
converter bypassed, radio receiving advertising, cellular phone in hand,
by-passing accidents and road kill to avoid getting involved ... Is this
a caricature of NCE, or is this how many Americans spend hours a day in
modern sprawl cities, living with settlement patterns framed by NCE
values?

The rich used to live in plain view, in the big house on Main Street.
They may have flaunted their wealth and abused their power, but they saw
and were seen. They took some responsibility for their towns, and
exercised some leadership: they and their tenants were in the same boat,
their common city. Now, class divisions are reenforced by spatial
segregation, as we follow the NCE panacea and "vote with our feet." The
rich cluster in exclusive suburbs and gated communities, or move off
entirely to enclaves at Aspen, La Jolla, or Palm Beach. They never even
have to see their tributaries any more, but relate to them through their
stockbrokers, agents, and the hired police.

Accordingly, alienation is the norm, and crime rates have soared. The
rejected, the unwanted, the landless might say with Richard T. Ely
himself, "Do you want me to commit suicide?" Idle hands are not simply
wasted, they steal, murder, burn, and destroy. Persons and property have
become notoriously insecure. The cumulative social costs of guarding
against assault, theft, arson, vandalism, trespass, extortion,
embezzlement - all the arts of gross and petty crime - amount to a large
fraction of the national income. The combination of democratic forms
with our divisive distribution of wealth, and our NCE leaders' distaste
for full employment, makes crime the most attractive allocation of
effort for millions of Americans, even though crime typically costs the
victim much more than it gains the criminal.

A culture of individual crime easily coalesces into mob crime,
triggered by some dramatic grievance, real or imagined. Now we have
periodic civil disturbances and insurrections, and the cost of putting
them down. In 1992 large parts of Los Angeles were torched, for the
second time in a generation, pretty much as foreboded by Henry George in
Progress and Poverty, Book X. Such colossal waste and barbarism traces
right back to the NCE policies that alienate great masses of able
people.

In the shadow world between crime and business there is now the vast,
gray underground economy. Tax evasion is the poor man's tax avoidance,
and our modern high taxes on exchange and production and payrolls and
income arrange it so many can only survive by evading taxes. Street
hawkers evade both taxes and high rents, and in some neighborhoods
constitute a chronic force. Once one is outside the law, other illegal
acts easily follow. The best-known of these is, of course, drug-dealing.
It is now a major industry, with a major counter-industry, the
"narcocracy," dependent on it. Rent-free and tax-free and highly
portable, it is the natural outlet for those whom NCE policies push off
the upperworld. Or did they expect them just quietly to commit suicide?

E. The national stature is dropping fast

The U.S.A., once so self-sufficient, has grown dangerously dependent
on importing raw materials, dependence so high we are subject to
extortion by our loyal OPEC "allies." To some extent this is based on
simple gains from trade, and is so rationalized by faithful NCEists. It
has some other, less creditable causes. One is that NCE policies have
stamped on our country the most energy-intensive, resource-wasting land
settlement pattern in the world, and in human history. This is the
result of heeding R.T. Ely's admonition that land speculators "perform
social service." Another cause is that our industry and farming are now
fully dedicated, by ideology and tax-bias, to displace labour with
capital and land. Capital and land require fossil-fuel energy as a
complement, where labour substituted for such energy.

Another cause is that American-based land speculators, especially after
World War II, have acquired shadowy titles to mineral holdings around
the world, under the U.S. military umbrella. Following J.B. Clark, they
have created value and wealth from those otherwise worthless natural
elements, recalling that Clark (1886, p.10) taught us that wealth is
created "from the mere appropriation of limited natural gifts
..." The cost of the military umbrella was mainly borne by U.S.
payroll-tax payers. Having firmed up their titles, the new owners
performed more social service by gaining privileged admission to the
U.S. market, thus raising our dependency on foreign sources.

The U.S.A., recently the "arsenal of democracy" and the most
efficient producer of almost every manufacture, now grows increasingly
dependent on foreign manufactures. To live in our inefficient cities,
and to pay several species of payroll taxes, American workers need
premium wages. The burden on employers grows too great. Relieved by NCE
individualism of ancient prejudices of patriotism and loyalty, they dump
American workers and transfer operations abroad.

It is notorious that the U.S.A., which once led the world in basic
international comparisons of welfare and performance, is falling behind:
in public health, in infant survival, in longevity, in literacy, in
numeracy, in athletics, in wage rates, in mental health, and so on. To
be sure, these are interpersonal comparisons, which Pareto taught are
"most unsatisfactory," and are purged from NCE. Does this say they have
no meaning? Perhaps, rather, it is NCE with its Paretian welfare
criteria that has no meaning.

The U.S.A., recently a metropolitan power center, is en route to
becoming again what it was in the 19th Century, an economic colony.
Alien ownership is rising in the centers of power and culture, and
wherever else land is highly rentable and lightly taxed. In the
post-Progressive culture property wields more political power than
citizenship, and it is becoming a question in some areas whether
citizens as such carry as much weight as alien landowners. Indeed, there
are now many water service districts in California, clothed with the
powers and immunities of sovereign government, in which only landowners
can govern, and voting is in proportion to landownership.

Recent electoral setbacks in Greece, Lithuania, Poland, and Russia
itself show that the current NCE model pushed by the IMF-World Bank
establishment is having trouble competing even with communism, even in
nations that know the worst face of communism. No longer is the U.S.
model so attractive that desperate nations yearn for it above all else.

American education no longer leads the world. Privatized education in
the form of commercial TV, given free use of the public domain to
operate for private gain, has to a high degree superseded public
education. NCE theorists should be pleased, but one can wonder: our
culture is impoverished. The public schools have us read Jane Austen and
Charles Dickens; they try, at least, to teach mathematics. TV gives us
murder, rape, soaps, racing cars, alcohol, drugs, "gangsta rap," tabloid
news, sound-bites, spectacles, and kinky sex. In the NCE view TV adds
most to the national product, guided by consumer sovereignty. Public
schools and libraries, being public, are inherently suspect. Public
libraries are forced to serve as public restrooms for the homeless.
Alternately starved and harassed, public institutions take the blame for
all the intellectual faults generated by a society and economy dominated
by NCE and its values.

Summing up, the recent harvest of NCE and its derived public policies is
a worsening condition of labour, lower returns to saving, high and
rising concentration of wealth and income, rising class divisions and
social problems, and a fall of national stature. It should be enough to
make us realize that NCE, forged as a strategem to discomfit Henry
George and Georgists, is intellectually, morally, and practically
bankrupt.